Real Estate Outlook
2009
The New World of Real Estate
Presented By:
Gary Watts
Real Estate Economist
Compliments of:
Unknown
Due to New Regulations
The New World of Real Estate
Chronology to a Financial Disaster – “The Perfect Storm”
1933 – Glass Steagall Act is passed to prevent banks and investment houses from acting as one entity.
1970 – HUD creates the first transaction using a mortgage-backed security sold by Ginnie Mae.
1977 – Community Reinvestment Act is passed to help make loans to less-qualified borrowers.
1985 – Asset securitization is applied to auto loans.
1986 – The first securitization of credit cards is sold.
1987 – Wall Street and insurance companies employ PhDs in mathematics to design new tools.
1988 – Citigroup invents the Structured Investment Vehicle (SIV)
1994 – Congress further empowers the CRA to increase homeownership.
1997 – Congress allows both Fannie Mae and Freddie Mac to lower reserves from 12% to 2.5%.
1998 – AIG does its first credit default swap
1999 – Gram-Leach-Bliley Act re-merges banks and investment houses back into a single entity.
2002 – Federal Reserve lowers interest rates as the economy continues to feel the effects of 9/11.
2002 – Credit rating companies begin their initial rating of SIVs, many with AAA ratings.
2002 – Audits of both Fannie Mae and Freddie Mac show mismanagement and accounting irregularities.
2003 – Two independent reports show that both Fannie and Freddie have no positive impact on housing.
2003 – Congress reduces future funding of both Fannie and Freddie.
2003 – Wall Street increases its participation in mortgage-backed securities.
2004 – The Fed, mistakenly thinking economy is weak, pumps in excess liquidity and keeps rates low.
2004 - Regulators allow investment bankers to decrease reserve requirements from 8.5% to 2.5%.
2004 – Analysis of Collateralized Debt Obligations (CDOs) shows sub-primes are the dominating debt.
2004 – Fannie and Freddie, trying to be viable again, begin purchasing these CDOs from Wall Street.
2005 – Fannie and Freddie are considered the “less affordable lenders,” and buy $1 trillion of CDOs.
2005 – Charge-off rates are below long term averages and lenders loosen credit standards.
2005 – Option-ARMs began making up 19.5% of the total loan volume.
2006 – Option-ARMs grow to 28.7% of the total loan volume, and sub-prime begins to show late-pays.
2006 – CDOs grow to $557 billion, but delinquencies on sub-prime loans begin to rise rapidly.
2006 – Credit rating agencies begin to make major downgrades on SIVs, affecting all credit markets.
2006 – The SEC keeps market to market rule in place, beginning the destruction of equities.
2007 – By May, sub-prime loans are dead and lending tightens.
2007 – In early August, there is a major call on credit default swaps against CDOs.
2007 – By the end of August, the securitization market is dead and the funding market is frozen.
2007 – SEC abolishes the uptick rule and drives the stake of death through financially sound institutions.
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2008 Year in Review: The Economy, Government and Financial Markets:
In August of 2007, mounting losses on sub-prime mortgages and mortgage-related securities began to strain financial institutions around the world. The repercussions from these losses have triggered a period of severe turbulence in world financial markets. In response, the Federal Reserve, the U.S. Treasury and other federal agencies have taken a series of actions, some unprecedented, to stem the turmoil.
Jan. 11: Bank of America acquires failing Countrywide.
Jan. 22: The Federal Reserve cuts the discount rate to 3.5%.
Jan. 30: Federal Reserve cuts the discount rate to 3.0%.
Feb. 07: Congress passes the Economic Stimulus Act to provide 159 million rebate checks to help the economy.
Mar.11: The Federal Reserve announces the creation of Term Securities Lending Facility (TSLF) with a
$200 billion rescue package to banks and investment houses, allowing them to put up the risky
mortgage-backed securities as collateral.
Mar. 14: JP Morgan Chase and Company announces the acquisition of Bear Stearns.
Mar.16: The Fed announces it will loan $29 billion to JP Morgan Chase to purchase Bear Sterns.
Mar 18: The Fed cuts the discount rate to 2.25%.
Apr. 30: The Fed cuts the discount rate to 2.00%.
June 05: The Fed approves the acquisition of Countrywide by Bank of America.
Standard and Poor’s downgrades AMBAC and MBIA from AAA to AA.
July 11: The Office of Thrift Supervision seizes IndyMac Bank and FDIC pays out $9 billion to depositors.
July 13: The Fed increases the credit line to both Fannie Mae and Freddie Mac.
July 30: Congress passes the Housing and Economic Recovery Act, authorizing $300 billion to help troubled
homeowners (HOPE Program). Another $100 billion goes to Fannie and Freddie, to bring a steady
supply of mortgages to homebuyers, and conforming loan amounts, including FHA, are increased.
Aug. 05: The Fed lowers the discount rate to 1.75%.
Sept. 07: Treasury puts Freddie Mac and Fannie Mae into conservatorship, pledging $200 billion to back assets.
Sept. 14: Bank of America announces the acquisition of Merrill Lynch.
Sept. 15: The Fed can not find a buyer for Lehman Bros. which is forced to file for bankruptcy.
Sept. 16: The Fed injects $85 billion into AIG to cover major calls on credit default swaps.
The Fed injects $70 billion more into the nation’s financial system.
Sept. 17: SEC temporarily halts short-selling of stocks.
Sept: 19: The Fed guarantees $50 billion to depositors of money market funds.
Sept. 25: The Office of Thrift Supervision seizes Washington Mutual and then sells it to JP Morgan Chase
with guarantees backed by FDIC.
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2008 Year in Review: (continued)
Sept. 29: The Fed makes an extra $330 billion available to other central banks, boosting to $620 billion
the amount available to the Fed through currency “swaps” arrangements for foreign currencies.
The Fed triples to $225 billion the amount available for short-term loans to U.S. financial institutions.
Citibank enters into an agreement to acquire Wachovia with guarantees from the FDIC.
Oct. 03: Wells Fargo announces an agreement with Wachovia with no assistance from FDIC.
Congress passes the Emergency Economic Stabilization Act to provide $700 billion (TARP) so the
Treasury can use the money to buy distressed mortgage-related securities from banks.
Oct. 07: FDIC announces deposit insurance coverage to $250,000 per depositor.
Oct. 08: Fed cuts rate to 1.5% and agrees to lend AIG another $37.8 billion, bringing the total to $123 billion.
Oct. 12: Fed approves the purchase of Wachovia by Wells Fargo.
Oct. 14: Treasury says it will use $250 billion to inject capital into the banking system and another $125 billion
to loan to the 9 largest banks (because they need the money).
The FDIC announces that it will guarantee up to a total of $1.4 trillion in loans between banks.
Oct. 24: PNC Financial purchases National City Corp., creating the 5th largest bank in the nation.
Oct. 29: The Fed cuts the interest rate to 1.0% the lowest rate since 1958!
Nov. 10: The Fed and Treasury replace loans to AIG with a new $152 billion package – largest in U.S. history!
American Express receives approval to become a bank.
Nov. 11: The Treasury announces new streamline loan programs for HUD and the HOPE alliance.
Nov. 12: Treasury says it will no longer buy distressed mortgage-related assets, but will inject capital into banks.
Nov. 14: Treasury purchases $33.5 billion in shares of preferred stock in 21 U.S. banks.
Three large insurance companies seek money from the TARP program.
Nov. 17: Treasury announces it has loaned a total of $158.6 billion to 30 U.S. banks.
Nov. 18: The three automobile giants go to Congress for TARP money.
Nov. 20: Fannie Mae and Freddie Mac suspend mortgage foreclosures until January 31, 2009.
Nov. 21: Treasury purchases $3 billion of stock in 23 more U.S. banks.
Nov. 23: The Treasury says it will invest $20 billion in Citigroup. Citigroup received $25 billion on Oct. 14th.
Nov. 25: The Fed announces that it will purchase up to $600 billion more in mortgage-related loans and will lend
another $200 billion to holders of securities backed by various types of consumer loans under TALF.
Nov. 25: The Fed announces new programs to buy Fannie Mae, Freddie Mac, Federal Home Loan Bank, and
mortgage-backed securities up to $100 billion with another $500 billion through asset managers.
Nov. 26: Fed approves Bank of America’s acquisition of Merrill Lynch.
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2008 Year in Review: (continued)
Dec. 03: SEC agrees to measure transparency and accountability at credit rating agencies for greater disclosure.
Dec. 05: Treasury purchases another $4 billion of preferred stock in 35 U.S. banks.
Dec. 10: FDIC reiterates that it will guarantee all FDIC claims in the event of bank failures.
Dec. 11: National Bureau of Economic Research announces that the U.S. expansion peaked in December ‘07
and we have been in a recession ever since!
Dec. 12: Treasury buys $6.25 billion of stock in another 28 U.S. banks.
Dec. 15: Fed approves the acquisition of National City Corp. by PNC Mortgage Co.
Dec. 16: The Federal Reserve reduces the discount rate to 0.25%.
Dec. 19: Treasury approves $13.4 billion for General Motors and $4 billion for Chrysler through TARP.
Treasury purchases another $27.9 billion in stock from 49 more U.S. banks.
Dec. 22: The Fed approves Citigroup as a bank holding company.
Dec. 23: Treasury buys $1.91 billion of stock in 43 U.S. banks.
Dec. 24: The Fed approves GMAC and IB Finance Holding to become a bank, and approves $33 billion to a
Utah industrial loan company to become a commercial bank.
Dec. 29: Treasury buys $5 billion equity stake in GMAC, and gives $1 billion to GM to help GMAC become
a bank.
Dec. 30: Fed announces the beginning purchases of mortgage-backed securities from Fannie Mae and
Freddie Mac, as announced on Nov. 25th.
Dec. 30: The SEC recommends against the suspension of fair value accounting standards.
Dec. 31: Treasury buys $1.91 billion of stock in another seven U.S. banks.
Epilogue:
As 2008 came to a close, the government had either loaned or guaranteed a total of $8.7 trillion dollars, which resulted in the money supply increasing by 71.8%! All this intervention has yet to help the economy, provide stability in our banking system or make credit available for the financial markets.
♦ 2.6 million jobs were lost last year (worst since 1945) and the unemployment rate has risen to 7.2%!
♦ 1.8 million mortgages entered foreclosure, with the banks taking back 860,000 properties!
♦ Stocks declined 37% and financial stocks declined 55.3%!
The mortgage relief for homeowners has yet to materialize in any significant way. One reason is that those securitized loans represent 68% of the total home mortgage market. These instruments are just too complex to unwind easily; they possess too many different owners in various “tranche” positions and, as housing prices fall, there is no simple way to fix this mess, which was originated by complex computer models.
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The Present State of Real Estate in Orange County:
2008 in Review:
Last year, only 26,551 homes were sold in Orange County. This was the lowest on record (by DataQuick) since 1988, and it represented a decline of 42% below the 20 year average.
The year ended with the median sales price of resale single family homes declining 29.2%, while resale condos declined 30.8%.
The median price for all homes ended the year at $397,000, a decline of 24.1%.
There were 24,819 notices of default filed and lenders took back a total of 11,560 homes in 2008.
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The New World of Lending:
For The Buyer:
1. There are 71% fewer mortgages available than a year ago.
2. Tightening credit standards are now in place at 85% of our banks.
3. Buyers putting down less than 20% must have a FICO score of at least 720.
4. All assets and income must be verified and could be re-verified at closing.
5. Fixed rate mortgages account for 69% of funded loans.
6. New conforming residential loan amount for Orange County is $625,500.00
7. Only 2.9% of buyers are taking an adjustable rate mortgage vs. 85% in 2005.
7. Short-sales are selling for 97% of list price, while foreclosures sell for 101% of list price.
FHA is the New Big Player.
1. Up-front insurance premium (MIP) is now 1.75%.
2. Over 95% financing, .55% monthly and .50% for less than 95%.
3. Down payment is 3.5% and the FICO score must be at least 580.
4. Down payment assistance programs have been abolished.
5. 45% front end and 55% back end debt ratios and 2 year employment history.
6. Must be greater disclosure to buyer on monthly payment changes.
7. Borrower must have a valid Social Security Number and be a legal resident of U.S.
8. Owner-occupied properties only, but “gift” is still available for down payment.
a. “Kiddy Condos” for kids in college.
9. Ch 7 BK – discharged 2 yrs. / 1 yr. Ch13 and foreclosure/short sale is 3 years.
10. FHA appraisers must be certified, which will cause a decrease in the number of appraisers.
11. New FHA Loan Limits for Orange County are:
One Unit Two Units Three Units Four Units
$625,500 $800,775 $967,950 $1,202,100
For Lenders:
1. Some lenders may no longer use “in-house” appraisers.
2. Financial institutions will be held liable for any misleading advertising.
3. Adjustable sub-prime loans cannot have a pre-payment penalty for 4 years.
4. Fixed sub-prime loans cannot have a pre-payment penalty for 2 years.
5. Truth in Lending statement must be printed in the native language of the borrower.
The Investor:
1. No more than 4 investment properties can be financed.
2. If investor puts down less than 20%, it introduces: PMI; higher rates; added approval by
insurance companies.
3. Loan rates are usually 0.75% to 1.0% higher than owner-occupied financing.
4. Investor loans are more difficult to get, because 40% of foreclosures are investment properties.
Source: FHA, Mortgage Bankers Association, Federal Reserve
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The New World of Lending: (continued)
For The Seller:
- Foreclosures and short-sales will continue to dominate the 2009 real estate market, as Orange County filed 7,062 notices of default in the 3rd quarter of 2008.
- Listing prices must be competitive with these properties for a successful sale.
- Regardless of sellers’ expectations, their house will be appraised conservatively.
- The buyers are still in control of pricing:
a. give careful consideration to a counter offer.
b. expect to pay for all termite and inspection report disclosures..
c. length of escrow will be the buyer’s choice.
d. market conditions can push escrow periods much longer.
e. making repairs and improvements ahead of time will help the marketing.
Loan Modifications:
1. Must have authorization letter to communicate with lender.
2. New law allows borrower to have an intermediary to discuss situation.
3. Fannie Mae has a Streamline Modification Program (SMP) for its securitized loans.
It is a fast-track method for getting homeowners affordable mortgage payments, extending
the term of the loan, lowering the interest rate and even deferring payments.
Seller must be 3 months behind, live in the home and have no bankruptcy filings.
4. Obtain required information and help seller complete the package properly.
Short Sales:
1. Must have authorization letter to communicate with lender.
2. Expect the entire process to take approximately 4 to 6 months.
3. Be aware that after servicing provider gives approval, the investor may have to sign off.
4. Make sure to “pad” estimated HUD-1 and cover non-paid items such as taxes, association
dues, transfer fees, county taxes, etc.
5. Escrow closes within 30 to no more than 45 days.
Foreclosures:
1. New law requires lenders to contact borrowers 30 days prior to filing a notice of default,
but only on owner-occupied home loans.
2. New state law allows renters to have 60 days to vacate a foreclosed property.
3. Lender or investor acquiring the property must care for abandoned animals.
4. Law requires lenders or investors to maintain the properties or face $1,000 dollar-a-day fines.
5. Both Fannie Mae and Freddie Mac will now notify renters prior to property entering the
foreclosure process, and will execute a short-term rental agreement until the property is sold.
6. California has followed the Federal laws, extending tax relief from any debt forgiveness.
IRS:
1. Will expedite release of tax liens on homes and paychecks.
2. In Offers-in-Compromise, equity in the property will no longer act as a deterrent.
3. Will postpone collections due to a loss of job, devastating illness or significant medical bills.
4. Will be more flexible on missed payments due to loss of job or hardship.
Source: FHA, Mortgage Bankers Association, Federal Reserve, IRS,
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The Outlook for 2009:
The Current Economic Headwinds:
1. Wealth Effect – due to declining assets
♦ Household equity is at 46.2%, vs. 57% ten years ago.
♦ In the U.S., there are 40 million homeowners who have no equity.
♦ PMI Mortgage Insurance Co. has ranked OC #6, in the nation, for continued price declines.
♦ If housing declines another 5%, another 2.1 million more homes will be upside down.
♦ California home prices are down 38%, from the previous year.
♦ Ca. foreclosures in 2008 totaled 236,231 versus 84,375 for 2007.
♦ December’s existing home sales, in the State, were dominated by foreclosures - 58%.
♦ Owners of foreclosed homes in December, owed $180,000 more than they were worth.
♦ In Orange County, last year’s foreclosures totaled 11,560 – more than double those in 2007!
♦ Notices of Default totaled 24,819 in 2008, up 80% from last year here in Orange County.
2. Income Effect – due to higher unemployment
♦ Current U.S. unemployment is at a 16-year high – 7.6%.
♦ Conference Board Employment Trends show economy could lose another 2 million jobs.
♦ In December, the U.S. average work week declined to 33.3 hours lowest since 1964!
♦ California’s current unemployment rate is 9.3% highest in 15 years.
♦ Last year, California lost a total of 373,000 jobs!
♦ Orange County’s unemployment rate is 6.5% the highest in 13 years.
♦ Orange County lost 41,400 jobs in 2008.
.♦ Less income, less paid taxes, more pressure on federal, state and personal budgets.
♦ The deficit for the 1st quarter for the U.S. was $485.2 billion – highest on record!
3. Financial “Credit Crunch”
♦ This is the 24th month since sub-prime, housing woes, and weak financials were reported.
♦ The delinquency rates on all mortgages in the U.S. rose to 3.96% in the 3rd quarter of ‘08.
♦ California’s overall delinquency rate is 4.72%.
4. Option ARM Nightmare
♦ Option ARM mortgages total $1.5 trillion, with Californians holding half of these
mortgages.
♦ 90% of Option ARMs borrowers are paying the minimum payment.
♦ This is causing the recast date to be reached earlier than had been projected.
♦ Both the 3-year and 5-year Option ARMs will be recasting in 2009.
♦ If borrower’s rate began at 1% to 2%, their payments will rise 80% to 100%.
♦ There is no doubt the borrowers are going to walk away!
♦ To make things worse, lenders will have to restate their earnings, because they counted the
unearned interest as income. After foreclosure, they will have to restate each quarter they
claimed, which will add additional losses to their balance sheets. They will have to raise
additional capital to cover losses – the double whammy!
Sources: Mortgage Bankers Association, U.S. Bureau of Labor, Ca. EDD, Federal Reserve, DataQuick
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A Final Perspective:
More stimulus packages will come from both the Obama administration and the Federal Reserve. The hope is that this will ease credit market fears, bring confidence to the economy, create jobs and help stabilize the real estate market. Signs to watch for:
♦ Interest rates continue to move downward and stay in the 4% to 4.5% range.
♦ Improving credit conditions will help bring in more buyers.
♦ More affordable housing prices should increase demand to the highest levels in 3 years.
♦ These price declines will bring more first-time buyers back into real estate ownership.
♦ Pent-up demand from buyers who missed the last cycle of 2005/2006 are entering the market.
♦ The foreclosure of homes will allow the lenders to recoup 60% to 70% of their investment.
♦ Some of the $3.5 trillion sitting in money market funds will begin moving into real estate.
♦ In the future, there will be a large migration of potential homeowners back to California.
Rebuilding Our “Housing Price Structure”:
We are nearing the long-term housing ratio of median price to median income. From 1986 to 2003,
the ratio was 2.6 to 3.2. In 2004 to 2006, the ratio grew to 4. Today, the housing index has declined
to 3.3, which brings us closer to operating within the normal bounds for housing.
♦ As we have seen, demand entry-level housing is tremendously strong.
♦ Most properties under $250,000 have multiple offers on them.
♦ By late spring, the properties under $300,000 should be pretty well firmed-up.
♦ By late summer, properties under $350,000 should have firmed up and the slow rebuilding
process of each level will continue to take place.
♦ It will take quite a few years to rebuild the entire price structure, provided nothing else
goes terribly wrong.
On Success
“Every man should make up his mind that if he expects to succeed,
he must give an honest return for the other man’s dollar.”
Edward Harriman
